Making Money With Contrarian ETFs

April 26, 2017

Brad Lamensdorf is a hedge fund guy. He invests with an absolute-return sensibility, looking for gains with a keen eye on downside protection. The two ETFs he’s involved with—and the firm he’s created, Active Alts—have a contrarian flavor, looking at stocks that are heavily shorted or out of favor. These aren’t your vanilla ETFs; rather, they are hedge-fundlike active alternatives that offer investors a different way to approach the market. Lamensdorf tells us why the AdvisorShares Ranger Equity Bear ETF (HDGE) and the Active Alts Contrarian ETF (SQZZ) are worth a look. Give me the big picture of how you got involved with HDGE and SQZZ.

Brad Lamensdorf: I'm a hedge fund guy, and I ran my own long/short hedge fund for quite a while. That’s my background. With HDGE, we’re making huge inroads in the marketplace. We all know the inverse community and the products they're producing don’t work. They’re meant to be held for a day, but do you know what's going to happen if a financial advisor starts buying it and selling it every day to hold that position? Churning. Churning the account.

The alternative is to short indexes. But when you're shorting indexes, you're shorting Apple, you're shorting Johnson & Johnson, you're shorting the companies that are the biggest, best companies in America, because their notional value is the biggest within the index.

When a correction comes, is that really what you want to be—short these companies? Or do you want to be short extremely weak fundamental companies that don't have near the cash flow or the balance sheet or the momentum to be able to handle the downdraft? That’s what we look for.

We feel that, for active management, we've done a super job. We made alpha in most corrections in the market since we started. We're an alpha generator when the markets go down, and that's when you need it most.

HDGE has a 1.6 beta to the S&P 500, and we're kind of even with what's going on; we're actually one or two points ahead this year. When you're mathematically looking at something that's higher beta, we should be down much more than the market. Obviously, the key is stock selection. Does playing the short side give you more alpha opportunity than if you were long? Why this focus?
Lamensdorf: I'm a long/short manager. I can trade both sides of the market. You can call me a nut, but I've seen this cycle play out millions of times, where the indexes are beating the active managers, and then the active managers come and destroy the indexes.

The problem is that when you think about everybody shoving all this money into these indexes, it becomes an extremely crowded trade. The good part for us is that there are many stocks that aren't in the indexes that are perfectly good. And they're being starved of capital because they're just not getting the same flows.


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